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New Studies Illustrate How Consumers Misjudge Home Values

Encouraged by strong price increases and hot sales this spring, increasing numbers of owners are listing their homes for sale. But chances are good that millions of owners are making wrong assumptions about the value of their homes, according to two new studies.

Wrong valuation assumptions can lead to bad decisions about whether to sell, when to sell and how to price a property. The result could be delays in selling and lowering the price below the amount needed to pay off the existing mortgage plus closing costs and make the down payment on a new one. For buyers, bad information can lead to overpaying for a house on the verge of a value decline or losing a house by making an ill-advised offer.

Appraisers also note that home owners often don’t realize that they may have over-improved their home compared to others in the neighborhood, which can lead to overestimated values. Owners may spend thousands of dollars for an ultra-gourmet kitchen when nobody else in their price point has done so, says Don Boucher, an appraiser in Washington, D.C.

Owners Overvalue by Eight Percent

A new study scheduled for publication by the Journal of Housing Economics by economists at CUNY and the City of New York found that homeowners overprice their homes by an average of 8 percent. Those who bought during times of appreciating prices such as the 2004-2006 housing boom tend to overestimate their value even more, as high as 12 percent. Owners who bought during the boom are inflating the value of their homes an average of $26,328 on a median priced existing home ($219,400).

“Many buyers during the housing boom in the early 2000s took on large and risky financial commitments facilitated by relaxed borrowing standards and the belief that house prices would continue to appreciate. These commitments made them more dependent on price appreciation to build equity. When the (thin) equity cushions quickly evaporated during the recent housing bust, refinancing mortgaged homes became very difficult and often impossible for these individuals,” wrote the authors.

Federal Reserve: Expectations Vary by Income Level

The Federal Reserve’s Report on the Economic Well-Being of U.S. Households in 2014 found that the majority of homeowners express optimism about the trajectory of home prices going forward. Just 6 percent of homeowners believe that home prices in their neighborhood will decline in the year after the survey, compared to 39 percent who expect home prices to rise.

The survey found that perceptions of the trajectory of home prices vary by income, with only 28 percent of homeowners making under $40,000 per year expecting rising home values in their neighborhood, whereas 51 percent of those making over $100,000 have similar expectations.

“These results might reflect actual differences in the expected trajectory of home values by neighborhood, or might simply reflect a broader optimism about the path of the economy that is generally projected by higher income respondents,” the study says.

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